The collapse of US-China trade talks and the ratcheting up of tariffs has intensified the challenges faced by global companies with operations that span both countries. In this piece, Lance reports on their range of responses to the trade war: some are shifting out of China, some are investing more in China, and some are not doing anything yet.

It is not clear if the latest trade actions launched by the US against Mexico and India form part of coherent plan. Such moves do signal that the US-centered multilateral trading system is hanging by a thread. This upending of the post-WWII order is especially bad news for trade-dependent emerging economies.

Markets have started to price in a long US-China trade and tech war, and we agree. The odds now favor an indefinite conflict. Damage from the trade war will vary based on a country’s trade-dependency and policy space. Big problems could emerge in Europe and in EMs exposed to China’s supply chain.

There is a big disconnect between markets and reported data in the eurozone. Bund yields are within a whisker of all time lows, inflation expectations have cratered and the Eurostoxx banks index fell -12.5% in May. Yet at the same, Europe’s macro data, while not great, points to stabilization after a 16-month industrial downturn.

In late 2017, Charles argued that global equity markets looked to be topping out, and it was time to adopt a more conservative strategy. As things turned out, the global equity benchmark hit a peak in late January of 2018, and has not retraced that level. He now argues that global equities have likely entered a bear market cycle.

Will a trade war boost US growth and inflation, or instead cause a deflationary recession? The bond market is basically saying that a trade war will dent US growth and force the Federal Reserve into easing. Bear with my two-handed explanation, but there are also good reasons why it could also boost nominal growth.

The escalation of the trade war with the US likely means that the People’s Bank of China will keep easing monetary policy. But as Chen Long explains, the PBOC will also be pursuing a structural reform agenda. It wants to boost lending to the private sector and move to market-based interest rates—while still preserving overall financial stability.

It is conceivable that some European industries may benefit from the trans-Pacific economic cold war, picking up business lost to their US and Chinese competitors as a result of the worsening tensions. But one sector that will not benefit is the European equity investor’s favorite: luxury goods. European luxury goods companies now face tougher times ahead.

China is widely seen as having a pretty miserable hand in its trade stand-off with China. However, Louis is not convinced that China has so few options. Here he considers Beijing’s scope for retaliation, and so leverage, from using its financial clout to spook US capital markets to winding up Kim Jong-un to start causing trouble for the US and its allies.

In yesterday's special Gavekal Research Conference call Gavekal's Arthur Kroeber and Dan Wang, along with Fathom China's Matt Forney, considered what the breakdown of the US-China trade talks means for the trajectory of the trade war, and what the blacklisting of Huawei means for the tech cold war.

Economic events create winners and losers. It is too early to say with confidence how the current US trade and technology confrontation with China will play out, or whether US tariffs on imported autos and the threatened retaliation will go into force. But it is possible to tell how great investors believe the potential disruption is likely to be.

The European Parliament elections saw established parties pummeled, but the political center broadly hold out against the forces of nationalist-populism. In this video interview, Cedric considers what that means for investors and how systemic European risk should now be understood.

For anyone who did not grow up in a Commonwealth country, one of the most perplexing things about the game of cricket is that matches can last for as long as five days, and at the end of it all still end up in a draw. Much the same can be said about European parliamentary elections: they take for ever, and it is often hard to identify a clear winner. Identifying losers, however, is simpler. And looking at Sunday night’s results there were both...

Since the collapse of the US-China trade talks, the public position of both sides has hardened. Top leader Xi Jinping’s call for a “new Long March” was widely taken as a sign he is ready for a protracted standoff with the US. But support for such a stance is not universal, as the surprising public comments of Huawei chairman Ren Zhengfei suggest.

After Narendra Modi’s landslide victory in India’s general election, the economic issues that must be tackled quickly are stacking up. Tom runs through the Indian leader’s inbox and concludes that the scale of the short term problems he faces rules out a 2014-style euphoric run-up in Indian equity.

Thursday was an ugly day for global equity markets, with losses that brought total returns on US equities almost back to their January 2018 level, and non-US equities to the brink of bear market territory. It is hard to shake the feeling that the investment environment has changed. What lessons should we draw from the tumultuous trading session?

Angry rhetoric between the US and Iran reached blood-curdling intensity after the US announced in late April that it wouldn't grant waivers for sanctions on Iran's oil exports. While this caused a short term spike in the oil price, it has since fallen about -8% from its high. Are oil traders too complacent about the risks, or does the market have it right?

On Wednesday the OECD added its voice to the chorus calling on the German finance ministry to open its fiscal tap and juice up economic growth with additional public spending on investment. Yet although the outlook for external demand is darkening, investors should not hold their breath for a sizable fiscal boost.

The rapid rise in China’s household debt has become a major concern for markets and policymakers. While most analysis looks at the household debt-to-GDP ratio, in this report Ernan calculates the household debt service ratio for a better angle on the problem. She finds that the debt burden on household budgets will keep increasing in 2019.

When something unexpected happens and the market moves against you, it is usually best to cut your losses. But sometimes it is worth indulging the contrarian instinct. This month most of the pound's gains in the first quarter have been given up and sterling’s position looks dicey. But sterling bulls should not cut their losses. In fact, they should consider doubling down.

The world and its dog are suddenly worried that the growing US-China trade war may be the event that sparks the next panic. Might I suggest that the looming iceberg that could yet sink the good ship Global Growth may not lie in the obvious spot where spy glasses are focused.The real menace may still lie in the European banking system.

The US government has China’s most prominent technology firm in a stranglehold. The question now is whether the US government continues to strangle Huawei until it goes out of business, or chooses to eventually stop squeezing and allow a weakened Huawei to keep operating under some limitations. In this report, Dan explores the possible scenarios.

This week EU voters will elect representatives to a legislature that has often been dubbed a snooze fest. That has changed as populist-nationalist parties challenge the established organs of government. Cedric gives a detailed explanation of how politics works at a supra-national level in Europe, and how current tensions are changing the key institutions.

Keeping track of all the pieces of the US-China confrontation has become a full-time job. But the chaos and uncertainty of the past couple of weeks has begun to resolve itself into fairly clear patterns, even if the outcomes remain in doubt. Three main conclusions emerge from last week’s activity, and none of them are particularly reassuring.

As if the macroeconomic impact of a full-blown US-China trade war weren’t enough to worry about, over the last couple of weeks investors have also had to contemplate the risk of a real shooting war between the US and Iran, the effect it would have on the price of oil and the threat that would pose to a fragile global economy and jittery world markets.

Since the US slapped fresh tariffs on Chinese exports a week ago, the renminbi has fallen, but by less than when the first round of tariffs were imposed last year. In this video interview, Chen Long discusses why that is, and how far China’s currency is likely to fall if things get worse.

China’s economic data for April came in rather worse than the too-good-to-be-true indicators for March. As Andrew explains in this report, the April figures do not actually show a serious deterioration, and property is still holding up. But the stabilization in growth is now under threat from a more protracted trade conflict with the US.

By putting off for six months its decision whether or not to impose a 25% tariff on all imports of passenger cars and car parts on national security grounds, the US administration bowed to expedience on Wednesday. In theory, the threat of auto tariffs remains on the table. In practice, the six month delay has robbed the proposal of much of its credibility.

Australian politics has been a psychodrama for more than a decade, but for investors it barely mattered. The country has grown rich on selling ever more rocks to China and following smart, evidenced-based policy at home. That, however, looks to be changing as this weekend voters go to the polls after an election campaign that may come to be seen as a watershed.

It is extremely unfashionable to say so, but Donald Trump’s campaign to bring manufacturing industries back to the US by slapping tariffs on goods imports may not be quite the act of economic illiteracy most professional practitioners of the dismal science would have you believe. On the contrary, it could well be positive for US growth, living standards, and market outperformance.

Demography, it is said, is destiny. If so, then the finger of destiny may be pointing at a more inflationary future for the world economy. Louis reviews the slow shifts in demographic profile which govern trends in consumption and savings, and so propel the forces of inflation and deflation over the very long term.

In response to the escalation of the US-China trade war, Chinese policymakers are likely to step up their easing measures. This should help support domestic demand. But as Chen Long argues in this piece, the effect of policy easing, coupled with the impact of increased tariffs on China’s exports, will add to downward pressure on the renminbi.

The US-China trade war has three potential outcomes. First, we could see a step back from brinksmanship and a deal in the next few weeks. Second, the two sides could dig in for more protracted negotiations. Third, the talks could break down and the trade war become permanent. With the probability of each outcome less than 50%, the only certainty is continued uncertainty.

Anatole returns to the framework he set out in November 2017, examining the 10 key risks that could threaten global markets over the next 18 months and which investors should monitor closely—and he comes to some surprising conclusions about the central locus of global dangers.

Since becoming president, Donald Trump has made it clear that he sees the S&P 500 as the real-time judge of his White House performance. Why, then, did Trump on Sunday send a tweet alleging that China had backed off from agreed positions in the US-China trade talks, and in so doing rattle a market priced for Goldilocks?

Eurozone economic growth was modest in the first quarter of 2019, but it was still stronger than most economists had expected, with Germany avoiding a recession and Italy returning to growth. Meanwhile eurozone equity markets are up a respectable 13% over the year to date. Does this mean Europe is emerging from its economic soft patch?

For equity investors, there is a never a good time to have a trade war. Nevertheless, if there must be one, the US stock market is now better placed to ride out a US-China tariff conflict than it was a year ago. That’s just as well. Chinese negotiator Liu He is set to arrive in Washington on Thursday for the latest round of trade talks which are going down to the wire.

The Trump administration’s trade war has targeted China’s ambitious industrial policy, which China clearly has no intention to abandon. But will that industrial policy work? In this report, Lance explains his eight-point system for evaluating industrial policy’s odds of success, and tests it on electric vehicles, airplanes and pharmaceuticals.

Investor concern this week is centered on the US-China trade negotiations, but Charles Gave and Louis Gave wonder if investors aren’t missing another risk, namely, that the world might be shifting from a deflationary to an inflationary environment. In our monthly Conference Call yesterday, they outlined arguments for why this may be the case, and what it would mean for portfolio construction.

After Donald Trump’s weekend tweets, trade war is once again the center of attention for investors. The perceived probability of an escalation has risen sharply, and risk assets have sold off. Asian emerging markets have not escaped the rout, but it would be a mistake for investors to treat all Asian emerging markets equally.

As the US-China trade talks enter a critical phase, all eyes are on a new meeting of officials and whether it can can break the log jam. Louis, however, wonders if investors may be missing a trick by purely focusing on issues of market access, enforcement and tariffs. Adjustments in the value of the renminbi may yet be the real story of any deal.

As the Federal Reserve launched the second round of its quantitative easing, the fear was that the Fed’s unorthodox monetary policy would ignite a new round of inflation throughout the world, with dramatic effects on asset prices. After all, most asset prices are driven by the interaction of inflation and economic activity. But inflation failed to materialize, and even fell from more than 3% globally in 2010 to negative territory in 2015. These...

In the Strategy Monthly I presented a fairly simple rule to show whether an economy is in the top, or the bottom half of the Four Quadrants framework. To show that the rule worked, I laid out relationships between the "rule" and a range of other useful indications of a price environment shift. Here, I capture all of these relationships in a simple, revised decision rule.

The improved economic outlook for China in 2019 owes a lot to an effective stimulus and progress toward a trade deal. But it has also been driven by top leader Xi Jinping’s surprising political pivot from champion of state enterprises to patron of the private sector. In this piece, Andrew examines how sincere Xi’s new stance will prove to be.

Any trade negotiator will tell you that the last yard is always the hardest. That is obvious now in the US-China trade talks, which were thrown into doubt by Donald Trump’s weekend tweets threatening to hike tariffs on US$200bn of imports from China from 10% to 25% this Friday if a deal is not done.

April’s US payrolls report showed job creation was stronger than expected and unemployment lower, yet wage pressures were softer. This suggests weaker unit labor costs will allow the Fed to remain dovish, at least for now. All else being equal this is positive for equity investors. The question is: How long can this benign combination persist?

When the market rate of interest for a long period has been held abnormally low relative to returns on invested capital, financial engineering takes off with huge debt issuance, making a chaotic denouement of the credit cycle unavoidable. To prepare for such an event, an equity portfolio hedged with gold can reduce volatility and raise returns.

Multinationals and investors are looking to India to deliver the next great surge in sales of consumer goods and services. But demand will not expand in a linear fashion as GDP increases. The acceleration phenomenon dictates that sales of different products and services will grow in leaps and bounds as cohorts of new consumers surpass key income thresholds.

The recent publication of a letter on the future of the Hong Kong dollar peg by Gavekal’s good friend Kyle Bass has triggered a flood of questions on the topic from clients. Now, Louis admits that there may be some home bias to this conviction that the Hong Kong dollar peg is not under threat. But in this paper, he sets out his answers.